I encourage you to read Jeremy Grantham’s analysis of historic bubbles (PDF). He’s tentatively predicting a near-term “melt-up” followed by a meltdown:
I find myself in an interesting position for an investor from the value school. I recognize on one hand that this is one of the highest-priced markets in US history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. The data on the high price of the market is clean and factual. We can be as certain as we ever get in stock market analysis that the current price is exceptionally high. In contrast, my judgment on the melt-up is based on a mish-mash of statistical and psychological factors based on previous eras, each one very different, so that much of the information available is not easily comparable. It also leans very heavily on a few US examples. Yet, strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing. Whether you will also, dear reader, remains to be seen.
Check out his graph Exhibit 13. Stocks have only been more expensive twice in American history than today: in 1999 and 1929.
I saw that article over at ZH. The interesting thing is that he makes an attempt at timing the return to mean. Tough task.
The market can remain irrational longer then you can remain solvent – attributed to Keynes.
One interesting thing is until the beginning of last year, the mood was far from euphoric by most measures, even after a long long bull market from 2009.
Stocks are at their most expensive in years. Debt back to high levels. Related? I suspect they are and it is cause for worry. Fortunately, EM tells me I can’t know what will happen so I can stop worrying, I think.
Steve